All quarter, investors watched political revolution in North
Africa and the Middle East
– and then in March, they tried to assess the impact of the
unprecedented series of tragedies in Japan.
All quarter, investors watched political revolution in North Africa and the Middle East – and then in March, they tried to assess the impact of the unprecedented series of tragedies in Japan. Wall Street came through all this tumult remarkably well: the S&P 500 rose 5.42 percent in the first quarter. Ultimately, U.S. investors responded to better-than-expected corporate profits and improved domestic economic indicators such as consumer spending and unemployment. During March, CNBC.com columnist John Carney joked of a “Teflon market”, and while Wall Street wasn’t that invincible, its first quarter performance was impressive. Certain commodities soared; home sales and prices retreated. At the end of the quarter, the bulls were still clearly in charge.
DOMESTIC ECONOMIC HEALTH
The first quarter ended with some superb news: the Labor Department noted that our economy had added 216,000 jobs, with more than a third of the new hires coming within the important category of business and professional services. Unemployment was at 9.0 percent in January, 8.9 percent in February and 8.8 percent in March – contrast that with the 9.8 percent jobless rate in November.
Consumer spending increased by 0.3 percent in January and 0.7 percent in February, but inflation was rising too, driven by jumps in energy and food prices. (Food prices rose 3.9 percent in March alone, and that was the biggest monthly increase since 1974.)
The Labor Department told us that producer prices soared by 1.6 percent in February after rising 0.8 percent in January; this put annualized wholesale inflation at 5.6 percent.
What were consumers buying? Well, they seemed to be buying fewer hard goods. Core durable goods orders (i.e., with transportation orders factored out) fell by 3.0 percent in January and 0.6 percent for February. However, the Census Bureau did note a 0.3 percent rise in retail sales in January followed by a 1.0 percent gain in February.
The key U.S. purchasing manager surveys brought good news. At the end of the quarter, the Institute for Supply Management’s monthly report on the service sector had hovered close to 60 in January (59.4) and February (59.7). ISM’s manufacturing report reached a peak of 61.4 in February before making a slight descent to 61.2 in March – still, the sector had grown for 20 straight months.
GLOBAL ECONOMIC HEALTH
In Asia, the inflation preoccupations of January and February gave way to March concerns over the damaged economy and infrastructure of Japan. Even with those concerns (and the yen dropping 2.4 percent in the first quarter against the dollar), there were signals of expansion.
China’s official purchasing managers index went to 53.4 in March from 52.2 in February, the first increase in four months; elsewhere in March, the benchmark PMIs in India (57.9), Taiwan (55.6) and South Korea (52.8) were all showing expansion.
South Korea’s inflation rate hit 4.7 percent last month and its exports were up 30.3 percent year-over-year in March. Indonesia’s inflation rate was 6.7 percent in March, down from 6.8 percent in February. China, of course, has been tightening for months in response to its inflationary pressures.
WORLD MARKETS
Eyeing global markets in U.S. dollar terms, we see that some of the biggest first quarter gains came in Europe. In fact, the world’s best performing stock index in the first quarter was Bulgaria’s SOFIX, which rose 35.1 percent. (The quarter’s worst performer? Egypt’s EGX 30. It dropped 23.0 percent.)
COMMODITIES MARKETS
Oil and silver, oil and silver: these two commodities were the talk of the quarter. However, a less glamorous commodity actually outperformed them.
Oil ended the first quarter at $106.72 a barrel, with its first quarter performance (+16.8 percent) topping its performance for all of 2010 (+15.2 percent). Prices increased 25 percent alone during a stretch of 13 market days in February. Silver futures advanced 22.5 percent for the quarter, and most of that happened in March.
Aluminum had a very nice quarter (+6.6 percent). Gold had one of its poorer quarters in recent history, rising just 1.3 percent. Platinum gained 0.3 percent on the quarter while palladium lost 4.4 percent. The U.S. Dollar Index lost 3.75 percent for the quarter.
Cotton proved the hottest fundamental commodity of first quarter 2011, with prices rising 38.3 percent. Corn futures gained 10.2 percent. Wheat prices fell 3.9 percent in the quarter after a 47.0 percent 2010 gain. The Dow Jones-UBS Commodity Index advanced 4.4 percent in first quarter 2011 after preceding quarterly gains of 15.8 percent and 11.6 percent.
REAL ESTATE
The quarter ended with a succession of sour notes for the housing market. The latest S&P/Case-Shiller 20-city home price index (January data) showed existing home prices down 3.1 percent from a year before and just 1.1 percent above the low from April 2009. S&P index committee chairman David M. Blitzer may have merely been the messenger, but he saw “no real hope in sight for the near future.”
The dreaded “double dip” seemed a real possibility.
As for existing home sales, the National Association of Realtors said they slipped 9.6 percent for February after a (revised) 3.4 percent improvement in January.
Even with the potential for serious readjustment of these statistics at the Census Bureau, the numbers were quite bad: down 19.1 percent for February (and 28.0 percent year-over-year) after slipping by 12.6 percent in January.
On March 31, Freddie Mac’s Primary Mortgage Market Survey put the average interest rate for the 30-year FRM exactly where it had been at the end of 2010: at 4.86 percent.
LOOKING BACK … LOOKING FORWARD
In a quarter notable for the severity of its disasters and the boldness of its political unrest, the U.S. stock indexes registered sizable gains.
The quarter represented the third chapter of a striking ascent for stocks. Across the last three quarters, the Dow has advanced 26.05 percent, the S&P 500 28.63 percent and the NASDAQ 31.85 percent.
Wall Street stood up to the challenges of the first quarter, but what might be ahead? Optimism remains: CNN Money surveyed 15 noted investment strategists and found that nine expect the S&P 500 to finish the year at 1,400 or higher. If the S&P does wrap up 2011 near the 1,400 level, that would mean a price return of around 11 percent.
The worries about a correction brought on by the events of March have subsided (for now) and we have some strong, positive indicators at home – a descending unemployment rate and manufacturing and service sectors that are clearly growing.
At the moment, oil and gasoline prices seem to be the biggest hazard for the consumer (and by extension the broad economy). Another earnings season begins next week; let’s hope that soaring oil and commodity costs haven’t dented corporate profits too much.
According to data compiled by Standard and Poor’s and Yale University’s Robert Shiller, the S&P 500’s earnings are poised to surpass the 2007 peak of $90 a share in the third quarter of 2011.
In the first quarter of 2009, earnings were just $7 a share. This would represent the biggest profit gain for the S&P 500 in the last 110 years. S&P and Shiller think that by the third quarter, the difference between S&P companies’ projected 12-month profits and average earnings over the last 10 years will be wider than at any time since 1951. That kind of talk might compel even the most bearish to stick with stocks.
